Business Directories

US could tap oil reserves as gasoline surges

Washington, March 7, 2011

The US government reiterated that it could tap its strategic oil reserves in order to safeguard economic growth as surging gasoline prices increase pressure for action.

While longstanding US policy is to release reserves only in the event of a significant and immediate supply shortage, some analysts say the Obama administration may feel compelled to try to tamp down prices that are being fueled both by outages in Libya and concern unrest could spread in the Middle East.

Reflecting market worries over unrest, crude futures prices were trading in Asia on Monday around their highest levels in more than two years.

Echoing comments made by a number of Obama officials over the past week, White House Chief of Staff William Daley told NBC television's 'Meet the Press' on Sunday: 'We are looking at the options. The issue of the reserves is one we are considering.'

'It is something that only is done -- has been done -- in very rare occasions. There's a bunch of factors that have to be looked at and it is just not the price,' he added. 'All matters have to be on the table when you go through -- when you see the difficulty coming out of this economic crisis we're in and the fragility of it.

He spoke just before a survey showed the second-largest two-week rise in gasoline pump prices ever. The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the influential Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the Feb. 18.

Congress has pressured the Obama administration to look to the emergency oil supplies as an option to ease consumers' fears over rising US gasoline prices, which are nearing the all-time high of $4.1124 per gallon hit on July 11, 2008, according to the Lundberg Survey.

Higher oil prices could undermine the fragile US economic recovery and damage President Barack Obama politically as he moves toward a 2012 re-election bid.

The US Strategic Petroleum Reserve holds 727 million barrels of oil, or about 38 days of consumption, and has only been tapped a handful of times since it was created in the mid-1970s after the Arab oil embargo. It was last used in 2005 following Hurricane Katrina.

Thus far the International Energy Agency (IEA) -- which coordinates reserves policy among the world's major energy consuming countries -- has made clear it will rely first on Opec to fill the void left by the violence in Libya, which has cut off an estimated 1 million barrels per day (bpd) of output.

IEA members South Korea and Japan, among the world's top 5 crude oil importers, have no immediate plans to tap into its strategic reserves, sources said.

'There is no concern at all over supply shortages,' said an official with Japan's Trade Ministry, which is in charge of the country's strategic oil reserves.

Opec powerhouse Saudi Arabia has stepped up production significantly, but oil prices remain high. The risk for markets is that the wave of North African and Middle East protests could spread to major Gulf oil producers, cutting off supplies that would be impossible to make up from other producers.

Despite longstanding US policy on the SPR, there are reasons to believe the reserves could be used more liberally now.

Unlike in 2008, when oil prices shot to nearly $150 a barrel in a demand-led rally, the rise this year is driven by a loss of supply -- a distinction that could give Obama more latitude to tap the reserves, even though Libya ships only a fraction of its oil to the US.

In addition, the global economy is in a more precarious state than was generally believed at the start of 2008, prior to the financial crisis.

'Sovereign debt issues need time and growth to resolve. High oil prices threaten that outcome. No leader will want to preside over a recession that they had the tools to avert,' said Lawrence Eagles, head of oil research at JP Morgan.

It traded above $117 a barrel on Monday, up more than 14 percent in the last two weeks. Last week, the price hit its highest level since 2008. US crude futures rose to more than $106 a barrel on Monday, also their highest level since 2008.

US federal law allows the government to tap the reserve during a national energy supply shortage that raises petroleum prices and could damage the economy. The president has the authority to determine such an emergency.

While the reserves could help make up for lost supplies, it is unclear how effective they would be in tempering fears that unrest could spread to other, bigger producers including Saudi Arabia, where security forces have detained at least 22 minority Shi'ites following protests last week.

US Treasury Secretary Timothy Geithner last week played down risks to oil supply, but also reminded lawmakers of the emergency stockpile.

'If necessary, those reserves could be mobilized to help mitigate the effect of a severe, sustained supply disruption,' Geithner told the US Senate Foreign Relations Committee.

But there has been growing support among Senate Democrats for tapping America's emergency oil supply.

US Energy Secretary Steven Chu on Wednesday had ruled out releasing oil from the reserve, saying ramped-up oil production in Saudi Arabia should lower the crude price. 'We're hoping market forces will take care of this,' he added. – Reuters